Among the many valuable insights expressed at the first Arabian World Construction Summit (AWCS) in Abu Dhabi, one deserves special attention. Brian Bruce, chief executive of South Africa’s Murray & Roberts, lamented the fact that construction is a fragmented industry.
There are no global players of scale. Even within individual national markets, it is usual for there to be no dominant player.
Construction companies are small by the standards of other industries. But they do employ huge numbers. Murray & Roberts, which has just completed work on Dubai International Airport’s terminal three and second concourse, has no less than 40,000 employees.
The Al Jaber Group, the UAE’s largest construction company, has almost as many and expects to employ 60,000 workers within five years. The Dubai joint venture Dutco Balfour Beatty has a payroll approaching 20,000.
In contrast, ExxonMobil, the world’s largest oil company, employs just over 80,000 people. Microsoft has about 79,000.
The comparatively small scale of most construction firms is reflected in turnover figures. Balfour Beatty, the UK’s largest construction firm, has an annual turnover of just over $4bn. BP, the largest British firm, has turnover of more than $70bn.
World construction is horizontally fragmented. It is also vertically disintegrated. No large Western firm works through the entire industry value chain, from real estate development to final customer sales. The normal pattern is for a property developer to appoint an architect and then an engineering team to work on the details. A completed scheme is delivered to an owner who uses a third party to complete sales.
The proliferation of contact points along the supply chain may explain why construction is dominated by disputes to an extent unknown in other industries. Construction executives at the AWCS openly admitted that relations between clients and suppliers are often adversarial.
The industry argues that it’s not perfect, but it works. Things in the end do get built, though they can cost more and take longer to complete than originally envisaged. It has always been that way, so why change?
This may be a reasonable point in the UK when construction accounts for about 7 per cent of gross domestic product (GDP). Construction is important, but a minnow compared with health, education, manufacturing and retail. It is not seen as a strategic industry as financial services is.
There is no such comfort in the Gulf where the construction boom is beginning to reach a crescendo. UAE Minister of the Economy Sheikha Lubna al-Qasimi said that real estate and construction are expected to account for 23 per cent of the federation’s GDP in 2010 compared with 16 per cent in 2006. This suggests that the turnover of the industry is likely to double between now and then. A similar pattern is likely throughout the GCC where MEED Projects reports about $1.5bn worth of major schemes are under way.
For the Middle East in general and the Gulf in particular, construction is not a secondary industry. It is one of the most important and will play a vital role in the region’s future. Nowhere else on earth have governments placed their hopes so unreservedly in the construction industry’s hands.
As the AWCS heard, the scale of the project boom is producing enormous challenges affecting every part of the supply chain. They cannot be addressed by the construction companies alone. But it is clear that the boom demands a new and different type of construction company.
Whatever their merits, the methods of the past are not well suited to the demands of a multi-trillion dollar market. The Gulf construction industry needs a huge injection of fresh engineering and project management talent. It needs better-trained employees working more efficiently for higher pay. It also requires a huge injection of capital to deal with the unprecedented risks being thrown up by the increasing scale and complexity of Gulf building contracts.
To increase speed of execution and reduce waste, it also probably makes sense sometimes for construction firms to expand vertically into engineering, design and even property development. The bolder ones might consider going downstream into real estate marketing.
To make this happen, Gulf construction requires, above all, visionary leadership. As the AWCS witnessed, this is beginning to emerge. The challenge is immense. But the opportunity is even larger. It is time that it was firmly seized